Here's The Problem With The Expanding Birthrate Of Web Startups

There is a general consensus that web startups are being created
at a faster rate than ever. The impact of accelerator programs
like Y Combinator, Techstars, Seedcamp, and dozens more are one
factor. The expanding pool of angel, seed, and super seed funds
is another. And the most important factor is how cheap it is to
build and launch a web service these days. You can bootstrap your
way into existence.

I like to think of the venture capital business like parenting.
When I invest in a company, I am committing to the care and
feeding of the company until cash flow breakeven (the startup
equivalent of adulthood). That care and feeding includes the
decision to call it quits and give up on the project sometimes,
but honestly that doesn't happen that much in our portfolios.

So when I look at this expanding birthrate, I think "who is going
to house, feed, school, and send all these kids to
college?"

Part of the answer is that this crop of startups is going to be
way more self sufficient than what has come before them. I
believe that is certainly true. We invested about a half a
million of seed capital into a company last year and it is
already profitable and there is a good chance that company isn't
going to need any more capital from us. But it will continue to
need advice of other sorts.

Part of the answer is that this crop of startups will get bought
out earlier than those who have come before them. Look at Hot
Potato. Josh
Kopelman said "we've only been investors for a couple of
months" about Hot Potato. That is a good outcome for the
founders. Not so much for the investors. But it is going to
happen more and more as large tech companies look for teams that
have a proven record of building and launching strong products.

But even with these two very positive factors, I worry like a
parent with too many kids. "Who is going to take care of all of
these kids?"

I am an investor in some of these super seed funds personally. I
see the capital calls. When a fund has called 40% of its
committed capital six months into its existence, I worry. What
happens when the money runs out? Will there be more?

Flatiron Partners came into existence in 1996. Today we still
manage a portfolio of four companies. That is down from something
like 55 total companies we funded. But the fact is fourteen years
later we still have four portfolio companies.

Union Square Ventures' first fund was raised in 2004. We invested
in twenty-one companies and we still have sixteen active
companies. And we still have $25mm on reserve for them. Christina and I calculated
last week that about half of those sixteen active companies still
might need more funding from us. So we have eight "kids who have
not yet reached adulthood". That is six years after we raised the
fund.

The thing that nobody understands until you've lived through it
is just how long it takes for some companies to get profitable
and self sustaining. And just how long it takes for some
companies to get liquid and leave the portfolio.

The VCs I talk to who have been doing this for 25 years or longer
aren't so much worried about the "dipshit companies" (as if there
were such a thing). They are worried about the entry of so many
new investors with relatively small funds birthing so many
companies. These veterans may not be as connected to the latest
web startup, but they sure are connected to the realities of the
venture capital business. They've lived through it and they know
what is involved with getting a company all the way to
profitability and exit.

The venture capital business is contracting. There are less VC
funds than there were a few years ago. And there will be fewer in
a few more years. And the birthrate of web startups is expanding.
That is the challenge we all face.

So, if you are an entrepreneur you should be very focused on
either getting to profitability or getting a VC firm or two with
deep pockets into your company (or both). If you are a seed
investor, don't go quite so fast. Reserve some funds for follow
on investments. And help your portfolio companies get to
profitability or get a VC firm or two with deep pockets into your
company.

I think this expanding birthrate is a great thing.
Entrepreneurship is alive and well all around the world. Smart
and scrappy entrepreneurs are imaging new products and services
and building them. But we all should be careful to think about
how we are going to fund all of this company creation. Not just
the first part of it, but all of it.